Credit News From Premier By Louis S. Barnes February 5, 2010
The potential collapse of the euro currency, sinking stocks, and a dead job market here have combined to push long-term rates down. 10-year Treasurys are trading at 3.57% despite a huge new borrowing next week, and mortgages are 5.00% flat.
Job losses appear to be bottoming, but the issue is new employment. The 'V' recovery spinners are the same guys as all last year, and someday they'll be right, but new unemployment claims are back up to 480,000 weekly, 2009 job losses were revised up by a million, and the drop in unemployment to 9.7% is statistical wandering.
We have survived the Great Recession thus far because of 'sovereign guarantees' all over the world. Bailouts and deficit spending are ultimately backed by national tax revenue to make good on promises and debts, and it has been a matter of some curiosity which nation or currency might fail the test of confidence. Europe it is.
The euro experiment rested on belief that Club Med nations would behave like Germans, disciplined in annual borrowing and cumulative debt. They never had behaved so, pre-euro, and their lower-productivity economies allowed them to play Germany only in good times. Now in hard times, Club Med's massive debt and deficits require massive sales of new bonds, and the soaring interest rates they must pay now have concluded the Ponzi scheme.
Dominoes, again. Big ones. A bunch of banks, no matter how big, was nothing compared to a row of sovereigns.
The G-7 ministers meet this weekend, and they will slap on some kind of shin plaster before Monday market-open. However, the Europeans have only two choices: the strong may bail out Club Med, or the euro-zone will break up -- back to drachma, lira, pesos, and a super-strong, remnant deutsche-euro. A bailout may buy time, even years, but would weaken the strong (even Germany's fiscal/debt position is precarious) and still not change the behavior of Club Med. A bust-up would collapse the value of Club Med bonds, a great many held by gullible German-zone banks.
In the short term, euro lose-lose is USA win-win. We are suddenly a safer haven than the previous safe haven. Dollar up, commodities crashing, it is easy to float our own version of Club Med. However, in the long term we are a domino ourselves, vulnerable by economic, financial, and political disarray.
Released Monday, our 2011 budget calls for $3.8 trillion in spending and a $1.3 trillion deficit. The $900 billion in defense spending is almost as big as Japan's total budget. Our deficit is larger than any nation's entire budget. Total Social Security, Medicare, and Medicaid spending in 2011 -- Boomer retirement still ahead -- will be $1.5 trillion versus $934 billion in revenue.
One of the central lessons of the Great Depression: don't try to balance your budget during a sick economy. Truth then -- when we owed practically nothing -- is not necessarily truth now. A fiscal fix is terribly difficult in the belly of the Great Recession, and in the presence of deeply deceptive Sirens like Paul Krugman who advocate limitless borrowing, but plan equally limitless tax increases at the first sign of recovery.
There is a lot at stake here: 400 years of Western Democracy brought unimagined prosperity, now threatened by 40 years of unspeakable self-deception, the system of government itself corrupted. Most democracies have behaved like warring spouses, each with a credit card, one wanting big house and travel, the other clothes, wine, and boat, and the inability to agree has racked both cards to the sky. In the end game, we lose both house and boat.
Different times, different challenges. If FDR had insisted in 1933 that the nation's greatest need was reform of health care, his own party would have hauled him off to a padded cell. Today, this nation is aching to hear from someone in either party or a new one, 'Our national security depends on living within our means, and competing in the global economy. Nothing else matters, or is even worth talking about.' |
